German “Mittelstand” is back

91% of companies still plan new investments in 2015

German Mittelstand companies, the backbone of the German economy, are waking up again. In recent years many of these companies were scared of another financial crisis and had fallen into numbness. Investments were put aside despite historically low interest rates.

In Germany, it is not only small and mid-cap businesses with up to 499 employees and revenues of up to €50m (approx. £ 37m) that are categorized as Mittelstand. Family owned businesses also come under the category, even when exceeding the € 50m threshold. The common denominator for Mittelstand – rather than size of the company – is the fact that management, risk and liability are entirely in the same hands and that management is thinking long term with future generations in mind.

The stable economic situation in Germany and increasing profits seem to have breathed new life into the Mittelstand. According to a study by Deutsche Bank among 400 German companies, 91% still plan to invest in 2015. Interestingly, 88% will be able to finance the spending from internal resources, 48% will use loans from the bank and 34% will lease. The fact that interest rates are still low means two things: those without sufficient internal resources are encouraged to loan money for their investment; while companies with surplus capital don’t see a reason to invest in securities and bonds and instead invest in new machines.

Companies with revenues of €25m and above (approx. £18.5m) are more likely to invest: As much as 96% in this group were planning to invest and 41% in this group plan investments of more than 2.5m. Among smaller companies with revenues below €25m, 86% say they will be actively investing. Three out of four of these smaller companies say they are going to spend up to € 2.5m (approx. £ 1.8m) in the remaining months of the year.

What’s on the shopping list?

Modernizing the corporate infrastructure is the highest priority for the majority of companies. Three out of four plan to invest in IT, office furniture or the fleet. Next up is the replacement of machines or other capital equipment (71%), followed by the purchase of new machines (55%).

Another study by German Sparkassen-Dachverband looks at the verticals with the highest likelihood to invest: the building sector, followed by metal construction, mechanical engineering and vehicle construction. Service providers for communication services, retail and gastronomy also show an above average inclination for investments.

UK companies should be testing the waters in this interesting market. Annual exports from the UK to Germany were £31,4b in 2014. Because of the likelihood of the target market to invest there is an opportunity for growth in 2015.